You may or may not know that the federal government recently announced some big changes concerning the guidelines for borrowers of high-ratio mortgages – a borrower who has a deposit of less than 20 per cent of the purchase price of a home. These guidelines must be adhered to by banks but not private mortgage lenders.
If you plan to borrow from a bank and need mortgage default insurance you must now meet the mortgage “stress test.” This means that as a borrower, you must be able to carry a mortgage based on current Bank of Canada rate for a five-year term which is currently 4.64%. This could be much higher than the rate for the term that your bank may be willing to offer you. Current 5 year posted fixed rates at many major banks are under 3%. While your payment will be based on the actual rate charged by your bank for the mortgage you agree upon, you must qualify based on the higher rate. This means if you are “tight” on your debt service ratio calculation you may be qualify for less than you did prior to this change. Taking the time to get pre-approved is even more important now than before.
If you already have a home these new requirements and guidelines do not affect you, or if your pre-approved mortgage commitment was already in existence prior to Oct. 17, 2016, however there may have a deadline for you to use that commitment. These changes are only for high ratio mortgages and will not affect you if you have more than 20% down payment.
If you are considering an investment property in Muskoka you will be glad to know these new provisions do not affect you. However, that is because most lenders have restricted the amount they will lend on investment properties to 80 per cent of the appraised value or purchase price, whichever is the lower amount.
These changes will likely affect the ability of some first-time home buyers to qualify for a mortgage. If you are a first-time buyer it may mean a longer wait before your purchase while you accumulate a bigger deposit or it may mean making the decision that your first home will be a little less glamorous than you may have hoped for.
This may all sound a bit gloomy but let’s be positive about it. By using this stress test, you should be less stressed about your ability to make your payments each month and when your mortgage comes up for maturity, IF the interest rates are higher, you should be able to afford the increased payment.
Ultimately this is a consumer protection bid by our government designed to help people keep their homes and not lose them if interest rates increase significantly.
November was Financial Literacy Month, and CREA (Canadian Real Estate Association) the national association to which I belong, has developed some resources you can use all year long to help understand some of the trickier financial concepts you might encounter during the home buying process.
There is a series of eight videos which cover topics from amortization to mortgage pre-payment to the Home Buyers’ Plan (HBP) and beyond. Each video is under two minutes and done in a fun, animated style, the videos break down some of the financial terms and implications you might come across.
You may also enjoy looking at the Homebuyers’ Road Map, a publication developed in collaboration with the Financial Consumer Agency of Canada, to help Canadians navigate the home buying journey.
Ultimately knowledge is power so I hope you will use these resources and will not hesitate to call me if you have any questions about buying your first or next home in Muskoka or if you have questions about your present home and the implications of these new mortgage rules.